US CPI hit 7% year-over-year, the highest since 1982, yet stocks rallied instead of selling off. The market had already priced in the number, and traders focused on Fed policy signals: anticipated March rate hikes and the end of QE tapering.
Chapters
Hi everyone, hope you're doing well. Just going to jump on as I'd had quite a few questions in regards to the US CPI number. It's just come out and as you can see from the headlines here on Bloomberg, it's hit a fresh 39-year high at 7% and it sets the stage for a Fed hike. So some quite forceful language being used by Bloomberg, the usual as you would expect Things like illustrating red-hot inflation, so on and so forth. Uh, the original thinking would be then, so how much did stocks come off if the Fed are then gonna start hiking sooner rather than later? The answer to that is the opposite has happened. Stocks have rallied and the dollar has weakened. So this is somewhat against kind of economic traditional theory, which would suggest then that if inflation is rampant, policy will tighten and that will be a net then removal away from the accommodative policies that we've seen from the likes of Fed and other central banks, and generally being met negatively by stocks. As I said, the opposite has happened. So why? Well, look, let's take a look at the charts first to get our heads around it. And as you can see here, I've got top left— so I'm just going to focus on a couple of assets to give you the overall kind of multi-asset picture to explain the rationale here. So EURUSD has popped higher on the back of the data. Dollar index has weakened, as you'd imagine. There's a cable reflecting a similar movement to what we've seen in EURUSD. The dollar index is now trading down 1/3 of 1%, albeit we've peaked here in the futures around the R2 in the euro. The Nasdaq, the biggest kind of casualty of this rising yield move that we've seen, um, under this idea about inflation and how the Fed are going to have to accelerate their normalization of policy. The Nasdaq actually up 125 points and namely coming on the back of the CPI release. So the Nasdaq bouncing, Dow futures, S&P futures following suit. We've also seen the likes of T-notes move just a little bit higher. So lower yields irrespective of the, the print. And oil's also just popped out above the top end of its range that's been restricting price action so far today. And it's finding a bit of a floor now at that price point of around $82. So let me just explain. The main thing here is about really the market's positioning and broader expectations. The new year of 2022 has really kicked off with this idea that inflation is now much higher than what the Fed had anticipated a few months ago. Now, what this has led to is a very distinct readjustment, a pivot from the Fed to become much more hawkish. And we saw that really solidified in the minutes last week. And also Powell's speech where he was talking about, look, inflation's too high, we're going to get it back under control. One of the main things that Powell said yesterday, of course, though, was talking about the balance sheet, and he was talking about specifically it might take 2 to 4 meetings until they can really have enough depth of discussion to decide about when to shrink the balance sheet. And so that being around, let's say, average 3 meetings would take us to May. Now, what the markets have been fearing and why yields have really been aggressively rising, that's been weighing on equities, fueling the dollar bid that we've had, really hurting tech stocks and crypto, is this idea that the Fed are not just going to hike rates. We know now markets are pretty much fully priced for a March hike and big banks are moving to a 4-call rate hike from what the Fed have forecasted, 3 in their December forecasts. It's not just about rate hikes. It's about when does QE finish? We know that they're going to tapering, will conclude that process in March. So we've got end of QE tapering completion. We've also got rate hikes. But when does the balance sheet start to shrink? Now, common kind of pattern has been in history that there's a little bit of a layover period to see how the market acclimatizes to no more active bond buying in the market. But given the inflationary conditions, many people had believed, and the way market's been reacting certainly in the last 2 weeks, uh, that's seen us come off these higher levels in the likes of equities, has been this idea that everything's going to happen at the same time. Now with this inflation figure, it's come out at 7%. That is super high, 4-decade high, but ultimately it's in line with market expectations. The market was expecting 7%. So yes, it's gone up from 6.8 the prior month's reading. Yes, it's the highest since 1982, and yes, the core reading is the highest since 1991. The point is, is that markets were probably more positioned for an even greater upside shock, and that hasn't materialized. Top end of the range today was 7.2, for example. And so actually, it's a little bit of relief at this point, coupled that with the comments about the balance sheet yesterday from Powell, hence why equities have had a forceful recovery over the course of the last 24 hours. Now, the move isn't massive, wouldn't expect it to be. Reason why: stocks had already rallied yesterday to a large degree, so a lot of that has already been taken back. But if you go back on my Twitter account to Monday when everyone was panicking, stocks were selling off, I was there saying, I wonder if we get an inline reading and stocks rally. And here we are. So just goes to show, you need to be aware of how the markets are positioned and context is king to interpret these types of things. So hopefully that was useful, and yeah, stay tuned. Please subscribe to the channel if you've not already done so, and I will see you for the next video. Thanks very much.
